Capita: the story of where UK public sector outsourcing began

Capita is a business process outsourcing (BPO) firm focusing heavily on the UK public sector market. With annual revenues over £2.7bn, it has become a lynch pin in public sector outsourcing.

Born into service: Capita's roots in Thatcherite liberalisation 

Capita is a business process outsourcing firm that focuses heavily on the UK market. With annual revenues now hitting over £2.7bn, it has become a lynch pin in public sector outsourcing, which comprises 50% of its revenues. But before Capita came along, public sector outsourcing barely existed in the UK.

Capita's history extends back beyond its incorporation to the early 1970s. The company’s real genesis lies in Thatcherism. It could be argued that without the Iron Lady’s policies, the environment for Capita’s inception and success wouldn’t have existed.

As the Conservatives eased into their new power in the early eighties, Rod Aldridge, who later founded Capita, was asked to investigate new ways for the Chartered Institute of Public Finance and Accountancy (CIPFA) to raise revenues. At this point, the Thatcher government was busy privatising much of the economy and driving efficiencies in the public sector. The emphasis was on local government to work more closely with the private sector, farming out contracts that would previously have been handled in-house. Aldridge conceived the possibility of servicing this market.

In 1984, CIPFA’s computer services division was launched, with just a couple of people on the payroll. Three years later, with 33 people working for the division, Aldridge launched a £330,,000 management buyout, backed by 3i. By 1991, Capita had increased its head count tenfold, and reached a turnover of £25m. It listed as a public company on the London stock exchange, two years after an initial public offering on the unlisted securities market.

From there, it gathered steam, reaching a turnover of £112 million in 1996, with a 3,500-person head count. During that year, it scooped an outsourcing contract with the Teachers' Pensions Agency, and began a Recruitment and Assessment service for the government.

Two years later, turnover had more than doubled to £238 million, with pre-tax profits of £27.1 million. Head count had grown to 5,000 people and it continued to scoop up more contracts, including a payroll and pension service for the Metropolitan Police, and an outsourced human resources contract for Westminster City Council.

The company also began scoring contracts with central government during the early nineties, which helped to bolster its revenues. Over the years, it has netted contracts including a multi-channel BBC Information Centre, The Criminal Records Bureau, the Health and Safety Executive and, more recently, the DVLA, with which it landed a five-year, £100m contract to manage vehicle tax and insurance evasion. As New Labour continued the Thatcherite tradition of farming out public sector functions to more efficient private sector organisations, Capita cashed in.


Controversies along the way

But things haven’t all been rosy for Capita (which declined to participate in this profile), or for all of its clients. For example, in 2001 the London Borough of Lambeth severed a £48m contract with Capita, claiming that its benefits service had deteriorated after the company took it over in 1997. Problems peaked in 2000, when it faced 55,000 outstanding queries, and the quality of the service was deemed unacceptable by the council, leading to the canceling of the contract three years before its expiry date.

There were other controversies, too. In 2003, when Ken Livingstone was the Mayor of London, he admitted that he had come close to sacking Capita over its operation of London's congestion charge scheme. The company renegotiated the contract, agreeing to tighter performance targets, in exchange for another £31 million in revenues over four years.

The Criminal Records Bureau contract was also beset by problems. Capita proved itself unable to administer the completion of criminal records checks for teachers on time, which caused problems for schools in the autumn of 2002. The contract was once again revised and revenues renegotiated. Capita incurred penalty charges for that one.

In 2007, Capita lost a contract with Blackburn with Darwen Council, originally agreed in 2001. One Labour leader at the time said: “I was unhappy with the service, but under the contract we had to wait about five years before we could do anything. We didn't feel we were getting particularly good value for money."

In other contracts, Capita was found to have directly contributed to clients' maladministration in the Individual Learning Accounts (ILA) contact. The ILA scheme was implemented in 2000 and abruptly pulled in 2001, after fraudulent activity was discovered. Credentials for individuals to access the scheme were being openly traded by both individual crooks and corrupt service providers, and used to cash out the accounts. People were still being prosecuted for fraud as late as seven years after the ILA debacle.


Longevity in public sector BPO

These gaffes among others earned the outsourcing company the informal name “Crapita” in irreverent publications such as Private Eye and The Register. And yet still, profits and revenues have soared. Its underlying profit before tax last year stood at £364m - up 12% year on year - on turnover up 2% at £2.75bn.

The BPO market has stood the firm in good stead over the years, thanks in part to an outsourcing frenzy in its core UK public sector market. In a report commissioned by Capita, IDC describes a £7.8bn market in the UK for business process outsourcing, and said that Capita had 23% of it (the same market share that it had in 2009). IDC estimated a total annual market potential of £117bn, indicating opportunities for growth.

But with the freeze of UK public sector spending, Capita is feeling the pinch. “In 2010, we faced a slowdown in decisions on major outsourcing contracts, lower additional spend by existing clients and reduced activity in some of our transactional trading operations due to constraints on public spending,” it said in its annual report.

Read more on Managing IT and business issues